A new report released this month by the European Investment Bank (EIB), “Banking in Africa: Delivering on financial inclusion, supporting financial stability,” highlights progress in financial inclusion and banking expansion in Africa. The report documents increasing financial inclusion in sub-Saharan Africa led by the adoption of mobile payment services across the continent. In 2017, 43 percent of the region’s population had access to an account (including mobile money accounts), up from 23 percent in 2011. Accounts at financial institutions have grown more slowly, rising from 23 to 33 percent of the population during 2011-17.

The report also documents the current financing landscape for small and medium-sized enterprises (SMEs) and the challenges faced by financial institutions in extending credit to SMEs using data from World Bank Enterprise Surveys and a 2018 EIB survey of banks in sub-Saharan Africa. As Figure 1 shows, 26 percent of survey respondents between 2011 and 2017 in sub-Saharan Africa listed access to financing as their biggest challenge, making it the most cited obstacle for their business. Electricity is second at 17 percent and competition from the informal sector is in third place at 11 percent. This limited access to finance is further highlighted as almost three-quarters of surveyed SMEs were financed by internal funds and only 10 percent have used bank finance.

Figure 1: Biggest business obstacles for SMEs in sub-Saharan Africa

For banks, as Figure 2 shows, lack of collateral and high default rates are the main challenge in lending to SMEs. Credit information gaps and high cost of monitoring borrowers together are cited by 16 percent of banks in the survey. Outside of SME specific constraints, increasing bank lending to the public sector in recent years has crowded out private sector lending in some countries, affecting SME lending in particular.

Figure 2: Main obstacles to SME lending

The report suggests that improving managerial capacity and access to credit information are areas where development partners can play a role through training and technical assistance. Helping SMEs improve financial reporting can increase their chances of getting bank credit. Further, well-developed credit bureaus can increase access to financing and lower interest rates for borrowers that are otherwise unable to demonstrate good creditworthiness, by making their information readily available to lenders.

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https://www.brookings.edu/wp-content/uploads/2018/11/RTR2DRFX.jpg?w=266By Dhruv Gandhi
A new report released this month by the European Investment Bank (EIB), “Banking in Africa: Delivering on financial inclusion, supporting financial stability,” highlights progress in financial inclusion and banking expansion in Africa. The report documents increasing financial inclusion in sub-Saharan Africa led by the adoption of mobile payment services across the continent. In 2017, 43 percent of the region’s population had access to an account (including mobile money accounts), up from 23 percent in 2011. Accounts at financial institutions have grown more slowly, rising from 23 to 33 percent of the population during 2011-17.
The report also documents the current financing landscape for small and medium-sized enterprises (SMEs) and the challenges faced by financial institutions in extending credit to SMEs using data from World Bank Enterprise Surveys and a 2018 EIB survey of banks in sub-Saharan Africa. As Figure 1 shows, 26 percent of survey respondents between 2011 and 2017 in sub-Saharan Africa listed access to financing as their biggest challenge, making it the most cited obstacle for their business. Electricity is second at 17 percent and competition from the informal sector is in third place at 11 percent. This limited access to finance is further highlighted as almost three-quarters of surveyed SMEs were financed by internal funds and only 10 percent have used bank finance.
Figure 1: Biggest business obstacles for SMEs in sub-Saharan Africa
For banks, as Figure 2 shows, lack of collateral and high default rates are the main challenge in lending to SMEs. Credit information gaps and high cost of monitoring borrowers together are cited by 16 percent of banks in the survey. Outside of SME specific constraints, increasing bank lending to the public sector in recent years has crowded out private sector lending in some countries, affecting SME lending in particular.
Figure 2: Main obstacles to SME lending
The report suggests that improving managerial capacity and access to credit information are areas where development partners can play a role through training and technical assistance. Helping SMEs improve financial reporting can increase their chances of getting bank credit. Further, well-developed credit bureaus can increase access to financing and lower interest rates for borrowers that are otherwise unable to demonstrate good creditworthiness, by making their information readily available to lenders. By Dhruv Gandhi
A new report released this month by the European Investment Bank (EIB), “Banking in Africa: Delivering on financial inclusion, supporting financial stability,” highlights progress in financial inclusion and banking ... https://www.brookings.edu/blog/future-development/2018/11/29/how-should-development-organizations-work-with-populist-governments/How should development organizations work with populist governments?http://webfeeds.brookings.edu/~/582893134/0/brookingsrss/topics/internationalmonetaryfund~How-should-development-organizations-work-with-populist-governments/
Thu, 29 Nov 2018 17:10:43 +0000https://www.brookings.edu/?p=550373

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By Massimiliano Santini

Earlier this month, as world leaders gathered in Paris to honor the 100th anniversary of World War I’s end, President Macron of France declared that “Europe almost committed suicide” during the war, and he attributed much of the blame to countries that put their own nationalistic interests ahead of everybody else. Two days later, U.S. President Trump tweeted that Macron “was just trying to get onto another subject,” since “there is no country more nationalist than France.”

Barely 20 years after the end of World War I, world powers began battling over their nationalistic pursuits again. When peace was finally achieved, liberal democracies created an international order that reflected their shared values that were to be implemented through institutions, treaties, and organizations like the United Nations, the WTO, and the European Union. Two decades after the collapse of communism, nationalism is back with a vengeance.

The nationalist resurgence

Populists like President Trump are raising serious challenges for the international liberal order. The U.S. has upended world trade relations, declared NATO obsolete, withdrawn from UNESCO, and defunded the United Nations Population Fund. Hungary and Poland have challenged the notion of liberal democracy, and the U.K. has voted to leave the European Union altogether. President Erdoğan has eroded Turkey’s democratic and secular foundations, while Venezuela has challenged both the world order and the development recipes it underlies. A new political narrative has emerged, worldwide, which focuses on nationalism and views international institutions as threats to national sovereignty and identity.

Development organizations like the World Bank and the IMF have been the institutional bedrocks of the financial architecture of the international liberal order, ready to intervene during financial crises and to provide funds and everyday assistance to improve people’s lives. As they were designed to solve problems of sovereign states, whether democratic or authoritarian, development organizations face today a moral dilemma: should they work with populist governments, which increasingly question the very existence of the liberal order and its fundamental values, like the rule of law, human rights, and solidarity?

They should—but with two caveats. First, they should increase the transparency of the relationship between donors, recipients, and the institution. Second, they should require the respect of key moral values as the conditionality for providing funds and assistance.

Not without conditions

Development organizations should radically increase the transparency of their collaboration with donors and recipients of aid. Among donor countries, the United States did not match its anti-globalization stance in April 2018 when it supported a $13 billion capital increase for the World Bank. Similarly, several populist governments have been pragmatic in working with development organizations, sometimes despite the political narratives that propelled them to power. Jair Bolsonaro, who recently won the presidential elections in Brazil, campaigned on a typical Washington Consensus economic agenda, asserting that he would like to push for free-market reforms similar to those introduced by Chile in the 1970s. In India, a religious populist government has been pushing for neoliberal free-market reforms since its inception in 2014. In Europe, Greek Prime Minister Alexis Tsipras first won elections on an anti-globalization socioeconomic agenda, and then embraced the liberal-democratic reforms pushed by the IMF, the European Central Bank, and the European Commission.

By making the relationship with populist governments more transparent, development organizations can keep the international community on alert about any potential backsliding, while continuing to work to improve the lives of all people, especially the poor. The choices and compromises that World Bank President Jim Kim and IMF Managing Director Christine Lagarde make should be publicly debated with the stakeholders of their respective organizations, as well as in the broader development community, since their implications are far and broad. Otherwise, decisions taken in the obscurity of their control rooms might be seen as being driven by the organizational instinct of self-preservation.

Development organizations should also ask for value-based conditionalities from populist governments that need their support. In fact, their work is not compatible with many of the values espoused by populists and, by willy-nilly aiding such governments, they might help them erode liberal institutions. Using Harvard economist Dani Rodrik’s well-known trilemma, democracy, globalization, and national sovereignty cannot all exist at the same time. If populist governments want international support, they should be willing to accept some value-based conditionalities that limit their sovereignty, help preserve their liberal democracy and the values it embodies, and implicitly legitimize economic globalization.

Regional organizations may actually provide the multilaterals useful pointers. The European Union, for example, was founded on the values of freedom, dignity, pluralism, non-discrimination, tolerance, justice, and solidarity. These are values that many European populists question, if not reject outright. Hungarian Prime Minister Viktor Orbán recently won reelection championing an illiberal democracy, while using European Commission’s funds to promote neoliberal economic reforms. However, according to the OECD, the total official development assistance (ODA) received by Hungary from multilateral development agencies such as the European Commission or the World Bank increased by 70 percent since Orbán first took power in 2010. The European Parliament voted to sanction Hungary for breaking EU rules on democracy, civil rights, and corruption. The EU has also been monitoring the constitutional transformations undertaken by the Law and Justice party in Poland, and it launched Article 7 disciplinary measures after deciding that the country had repeatedly compromised judiciary independency. Similarly, Poland’s ODA increased by over 1,300 percent since 2015, when the Law and Justice party returned to power with a parliamentary majority. Following a European Court of Justice’s ruling, the polish government last week backtracked on controversial reforms it made to lower the retirement age of Supreme Court judges. In the Western Hemisphere, the Organization of American States has been monitoring the situation of Venezuela’s Chavez and Maduro regimes for years. It is now openly advocating for regime change, following the “democratic clause” in its charter. Development organizations like the World Bank and the IMF could follow suit and link their financial assistance to similar value-based conditionalities.

Once more, an appeal to morality

The architecture of the international liberal order must be modernized using a combination of increased transparency and a razor sharp focus on moral and ethical values. Otherwise, the world could suffer the sort of mayhem that happened during the two World Wars. As long as global interdependence continues to increase, governments of all shapes and sensibilities will need to work together to solve global problems, using the institutions that the 70-year old liberal order created for precisely this purpose. Development organizations should work with all polities, provided they preserve the moral foundations of the liberal order. Until the world develops an alternative global arrangement that reflects a new consensus, the international liberal order is the best hope for shared prosperity.

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By Massimiliano Santini
Earlier this month, as world leaders gathered in Paris to honor the 100th anniversary of World War I’s end, President Macron of France declared that “Europe almost committed suicide” during the war, and he attributed much of the blame to countries that put their own nationalistic interests ahead of everybody else. Two days later, U.S. President Trump tweeted that Macron “was just trying to get onto another subject,” since “there is no country more nationalist than France.”
Barely 20 years after the end of World War I, world powers began battling over their nationalistic pursuits again. When peace was finally achieved, liberal democracies created an international order that reflected their shared values that were to be implemented through institutions, treaties, and organizations like the United Nations, the WTO, and the European Union. Two decades after the collapse of communism, nationalism is back with a vengeance.
The nationalist resurgence
Populists like President Trump are raising serious challenges for the international liberal order. The U.S. has upended world trade relations, declared NATO obsolete, withdrawn from UNESCO, and defunded the United Nations Population Fund. Hungary and Poland have challenged the notion of liberal democracy, and the U.K. has voted to leave the European Union altogether. President Erdoğan has eroded Turkey’s democratic and secular foundations, while Venezuela has challenged both the world order and the development recipes it underlies. A new political narrative has emerged, worldwide, which focuses on nationalism and views international institutions as threats to national sovereignty and identity.
Development organizations like the World Bank and the IMF have been the institutional bedrocks of the financial architecture of the international liberal order, ready to intervene during financial crises and to provide funds and everyday assistance to improve people’s lives. As they were designed to solve problems of sovereign states, whether democratic or authoritarian, development organizations face today a moral dilemma: should they work with populist governments, which increasingly question the very existence of the liberal order and its fundamental values, like the rule of law, human rights, and solidarity?
They should—but with two caveats. First, they should increase the transparency of the relationship between donors, recipients, and the institution. Second, they should require the respect of key moral values as the conditionality for providing funds and assistance.
Not without conditions
Development organizations should radically increase the transparency of their collaboration with donors and recipients of aid. Among donor countries, the United States did not match its anti-globalization stance in April 2018 when it supported a $13 billion capital increase for the World Bank. Similarly, several populist governments have been pragmatic in working with development organizations, sometimes despite the political narratives that propelled them to power. Jair Bolsonaro, who recently won the presidential elections in Brazil, campaigned on a typical Washington Consensus economic agenda, asserting that he would like to push for free-market reforms similar to those introduced by Chile in the 1970s. In India, a religious populist government has been pushing for neoliberal free-market reforms since its inception in 2014. In Europe, Greek Prime Minister Alexis Tsipras first won elections on an anti-globalization socioeconomic agenda, and then embraced the liberal-democratic reforms pushed by the IMF, the European Central Bank, and the European Commission.
By making the relationship with populist governments more transparent, development organizations can keep the international community on alert about any potential backsliding, while continuing to work to improve the ... By Massimiliano Santini
Earlier this month, as world leaders gathered in Paris to honor the 100th anniversary of World War I’s end, President Macron of France declared that “Europe almost committed suicide”https://www.brookings.edu/blog/future-development/2018/11/07/the-fate-of-the-world-bank-during-a-divided-us-government/The fate of the World Bank during a divided US governmenthttp://webfeeds.brookings.edu/~/578932958/0/brookingsrss/topics/internationalmonetaryfund~The-fate-of-the-World-Bank-during-a-divided-US-government/
Wed, 07 Nov 2018 19:59:48 +0000https://www.brookings.edu/?p=546906

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By Christopher Kilby

In its first two years, the Trump administration has not paid much attention to the World Bank. Recent research suggests that this will change now that Republicans have lost control in the House of Representatives in this week’s midterm elections.

How US politics influence the World Bank

To obtain new bilateral aid or to change the use of already approved funds, the U.S. administration must receive approval from committees in both the House and the Senate. Losing control of either chamber can limit the administration’s ability to use bilateral aid for foreign policy purposes. In that case, using the World Bank as a foreign policy tool becomes more attractive. Historically, that is when we see the most evidence of U.S. influence in the World Bank. (I will discuss these issues also as part of a panel at a multidisciplinary conference on the New Building Blocks of Development, at Duke University, November 15-16.)

In a forthcoming article in the “Review of International Organizations,” my colleague Erasmus Kersting and I explore the role of U.S. domestic politics in shaping U.S. influence over the World Bank. Our argument mirrors the one laid out above. In the short run, there are many ways the U.S. administration can influence the World Bank—through formal actions of its Executive Director, through informal networks (often with Treasury serving as the lead agency), and through World Bank middle management. It is more likely to exercise this influence—and in the process undermine the Bank’s independence—when a divided U.S. government restricts the administration’s ability to use bilateral aid as a foreign policy tool.

Thus far, the Trump administration has been anti-multilateral. It has not favored things through established international organizations, e.g., preferring bilateral trade measures to operating through the World Trade Organization. How that might change is an open question. The Reagan administration was also staunchly anti-multilateral until its second term, when the administration realized the multilateral development banks could provide a solution to the Latin American debt crisis then dogging U.S. commercial banks. That culminated in the Brady Plan, which started a few weeks into the George H. W. Bush administration. So we might see a turnaround in the Trump administration’s attitude if the World Bank suddenly becomes useful because Congress is uncooperative or due to a global crisis that threatens U.S. interests.

Actually, what seems more likely at this point is an increase in negative U.S. pressure. That is, if Congress does not allow the administration to cut bilateral aid to punish countries, the administration might push the World Bank to cut its lending to those countries. The U.S. has exerted some influence like this in the IMF already (until recently—with the release of pastor Andrew Brunson—letting it be known that the U.S. would not support an IMF bailout for Turkey). Because the business of the World Bank is lending, the institution would resist pressure to cut lending more than it would resist pressure to increase lending. But the Trump administration’s hostility to multilateral agencies actually makes its threats toward them credible, and might give it leverage to effect such changes.

Long run implications for the World Bank

World Bank lending doubled in response to the global financial crisis. A sharp drop in World Bank lending now could put it in the perilous position of being a development agency with a negative net resource flow—receiving more in loan repayments from poor countries than it sends out in new loans.

The broader question—given the sometimes hard-to-reverse actions of the current U.S. administration—is what would happen to the world order without U.S. leadership. Despite the generally negative press, the U.S. has often been a force for good. In the World Bank, for example, it pushed for project evaluation in the 1970s, was instrumental in the founding of the Inspection Panel in the 1990s, and has been advocating for more information disclosure in the 2000s. It is hard to envision another country taking over the leadership mantle since the World Bank’s Articles of Agreement give the U.S. an effective veto over structural change.

Instead, the institution is likely to drift. Current trends, like the proliferation of special purpose trust funds administered by the World Bank, will continue. But they are a poor substitute for leadership. Lack of leadership will make it hard to maintain core funding through replenishments of IDA, the World Bank’s soft loan window for very poor countries, and via capital increases for the IBRD, the World Bank’s hard lending window for middle-income countries.

The Trump administration’s antipathy toward multilateralism and, in particular, toward the international commitments of prior U.S. administrations will accelerate the trend among credit rating agencies to discount World Bank callable capital and instead focus on paid-in capital when rating bonds issued by the World Bank. These bond ratings are essential for the Bank’s business model: borrowing cheaply on international markets and then re-lending to low- and middle-income clients at rates lower than what those countries could get on their own. To protect its bond rating, the World Bank will have to watch its lending levels, further restricting the institution’s options and making it more reliant on non-core funding, such as trust funds.

The World Bank has weathered U.S. disinterest before, eventually being rescued by a global crisis or change in U.S. administration. How much damage is done now depends on how long the current partisanship lasts, whether the administration goes from disinterested to hostile, and how other donor countries—and World Bank management—respond. While the rise of China poses a long-term challenge, the disinterest of Trump in multilateral matters poses a more daunting and more immediate problem.

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By Christopher Kilby
In its first two years, the Trump administration has not paid much attention to the World Bank. Recent research suggests that this will change now that Republicans have lost control in the House of Representatives in this week’s midterm elections.
How US politics influence the World Bank
To obtain new bilateral aid or to change the use of already approved funds, the U.S. administration must receive approval from committees in both the House and the Senate. Losing control of either chamber can limit the administration’s ability to use bilateral aid for foreign policy purposes. In that case, using the World Bank as a foreign policy tool becomes more attractive. Historically, that is when we see the most evidence of U.S. influence in the World Bank. (I will discuss these issues also as part of a panel at a multidisciplinary conference on the New Building Blocks of Development, at Duke University, November 15-16.)
In a forthcoming article in the “Review of International Organizations,” my colleague Erasmus Kersting and I explore the role of U.S. domestic politics in shaping U.S. influence over the World Bank. Our argument mirrors the one laid out above. In the short run, there are many ways the U.S. administration can influence the World Bank—through formal actions of its Executive Director, through informal networks (often with Treasury serving as the lead agency), and through World Bank middle management. It is more likely to exercise this influence—and in the process undermine the Bank’s independence—when a divided U.S. government restricts the administration’s ability to use bilateral aid as a foreign policy tool.
The case of Trump
Obviously, the Trump administration has not always followed the typical patterns. Trump has very publicly used cuts in bilateral aid to punish countries (“the stick”—see Trump’s recent threats to cut aid to Guatemala, Honduras, and El Salvador); the use of aid increases as a reward (“the carrot”) is less evident. In some cases, Congress has pushed back against Trump’s rescission plans. With the Democrats in control of one chamber, we can expect more pushback—even in the case of cuts to aid.
Thus far, the Trump administration has been anti-multilateral. It has not favored things through established international organizations, e.g., preferring bilateral trade measures to operating through the World Trade Organization. How that might change is an open question. The Reagan administration was also staunchly anti-multilateral until its second term, when the administration realized the multilateral development banks could provide a solution to the Latin American debt crisis then dogging U.S. commercial banks. That culminated in the Brady Plan, which started a few weeks into the George H. W. Bush administration. So we might see a turnaround in the Trump administration’s attitude if the World Bank suddenly becomes useful because Congress is uncooperative or due to a global crisis that threatens U.S. interests.
Actually, what seems more likely at this point is an increase in negative U.S. pressure. That is, if Congress does not allow the administration to cut bilateral aid to punish countries, the administration might push the World Bank to cut its lending to those countries. The U.S. has exerted some influence like this in the IMF already (until recently—with the release of pastor Andrew Brunson—letting it be known that the U.S. would not support an IMF bailout for Turkey). Because the business of the World Bank is lending, the institution would resist pressure to cut lending more than it would resist pressure to increase lending. But the Trump administration’s hostility to multilateral agencies actually makes its threats toward them credible, and might give it leverage to effect such changes.
Long run implications for the ... By Christopher Kilby
In its first two years, the Trump administration has not paid much attention to the World Bank. Recent research suggests that this will change now that Republicans have lost control in the House of Representatives in this ... https://www.brookings.edu/events/unconventional-monetary-policy-how-well-did-it-work/Unconventional monetary policy: How well did it work?http://webfeeds.brookings.edu/~/571711512/0/brookingsrss/topics/internationalmonetaryfund~Unconventional-monetary-policy-How-well-did-it-work/
Thu, 27 Sep 2018 17:09:40 +0000https://www.brookings.edu/?post_type=event&p=538912

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After pushing short-term interest rates down to zero, the Federal Reserve Bank and the central banks in the United Kingdom, Europe, and Japan experimented over the past decade with an unprecedented set of monetary tools that come to be known as “unconventional monetary policy” – forward guidance about future policies, quantitative easing or large-scale asset purchases, negative interest rates. The time has come to step back and ask how well these unconventional monetary policies worked, and whether central banks should use them in the future. To answer those questions, the Hutchins Center on Fiscal & Monetary Policy has commissioned two papers that are forthcoming in the Journal of Economic Perspectives.

On Wednesday, October 17, the Hutchins Center hosted an event at which the authors of those papers – Ken Kuttner of Williams College, who wrote about the United States, and Giovanni Dell’Ariccia, Pau Rabanal, and Damiano Sandri of the International Monetary Fund, who wrote about the rest of the world – presented their findings and discussed them with a panel of monetary policy experts.

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Washington, DCpast15397848001539792000America/New_YorkAfter pushing short-term interest rates down to zero, the Federal Reserve Bank and the central banks in the United Kingdom, Europe, and Japan experimented over the past decade with an unprecedented set of monetary tools that come to be known as “unconventional monetary policy” – forward guidance about future policies, quantitative easing or large-scale asset purchases, negative interest rates. The time has come to step back and ask how well these unconventional monetary policies worked, and whether central banks should use them in the future. To answer those questions, the Hutchins Center on Fiscal & Monetary Policy has commissioned two papers that are forthcoming in the Journal of Economic Perspectives.
On Wednesday, October 17, the Hutchins Center hosted an event at which the authors of those papers – Ken Kuttner of Williams College, who wrote about the United States, and Giovanni Dell’Ariccia, Pau Rabanal, and Damiano Sandri of the International Monetary Fund, who wrote about the rest of the world – presented their findings and discussed them with a panel of monetary policy experts. After pushing short-term interest rates down to zero, the Federal Reserve Bank and the central banks in the United Kingdom, Europe, and Japan experimented over the past decade with an unprecedented set of monetary tools that come to be known as ... https://www.brookings.edu/bpea-articles/the-first-20-years-of-the-european-central-bank-monetary-policy/The first 20 years of the European Central Bank: Monetary policyhttp://webfeeds.brookings.edu/~/569396120/0/brookingsrss/topics/internationalmonetaryfund~The-first-years-of-the-European-Central-Bank-Monetary-policy/
Thu, 13 Sep 2018 04:00:59 +0000https://www.brookings.edu/?post_type=bpea-article&p=536728

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By Philipp Hartmann, Frank Smets

Abstract

On 1 May 2018, the ECB delebrated its 20th anniversary. This paper provides a comprehensive view of the ECB’s monetary policy over these two decades. The first section provides a chronological account of the macroeconomic and monetary policy developments in the euro area since the adoption of the euro in 1999, going through four cyclical phases “conditioning” ECB monetary policy. We describe the monetary policy decisions from the ECB’s perspective and against the background of its evolving monetary policy strategy. We also highlight a number of the key critical issues that were the subject of debate at the time. The second section contains a partial assessment. We first analyze the achievement of the price stability mandate and developments in the ECB’s credibility. Next, we investigate the ECB’s interest rate decisions through the lens of a simple empirical interest rate reaction function. This is appropriate until the ECB hits the zero-lower bound in 2013. Finally, we present the ECB’s framework for thinking about non-standard monetary policy measures and review the evidence on their effectiveness. One of the main themes of the paper is how ECB monetary policy responded to the challenges posed by the European twin crises and the subsequent slow economic recovery, making use of its relatively wide range of instruments, defining new ones where necessary and developing the strategic underpinnings of its policy framework.

Citations

Conflict of Interest Disclosure

The authors did not receive financial support from any firm or person for this paper or from any firm or person with a financial or political interest in this paper. They are currently not officers, directors, or board members of any organization with an interest in this paper. No outside party had the right to review this paper before circulation.

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By Philipp Hartmann, Frank Smets
Abstract On 1 May 2018, the ECB delebrated its 20th anniversary. This paper provides a comprehensive view of the ECB's monetary policy over these two decades. The first section provides a chronological account of the macroeconomic and monetary policy developments in the euro area since the adoption of the euro in 1999, going through four cyclical phases “conditioning” ECB monetary policy. We describe the monetary policy decisions from the ECB's perspective and against the background of its evolving monetary policy strategy. We also highlight a number of the key critical issues that were the subject of debate at the time. The second section contains a partial assessment. We first analyze the achievement of the price stability mandate and developments in the ECB's credibility. Next, we investigate the ECB's interest rate decisions through the lens of a simple empirical interest rate reaction function. This is appropriate until the ECB hits the zero-lower bound in 2013. Finally, we present the ECB's framework for thinking about non-standard monetary policy measures and review the evidence on their effectiveness. One of the main themes of the paper is how ECB monetary policy responded to the challenges posed by the European twin crises and the subsequent slow economic recovery, making use of its relatively wide range of instruments, defining new ones where necessary and developing the strategic underpinnings of its policy framework.
Citations Hartmann, Philipp, and Frank Smets. 2018. “The First 20 Years of the European Central Bank: Monetary Policy” BPEA Conference Draft, Fall.
Conflict of Interest Disclosure The authors did not receive financial support from any firm or person for this paper or from any firm or person with a financial or political interest in this paper. They are currently not officers, directors, or board members of any organization with an interest in this paper. No outside party had the right to review this paper before circulation. By Philipp Hartmann, Frank Smets
Abstract On 1 May 2018, the ECB delebrated its 20th anniversary. This paper provides a comprehensive view of the ECB's monetary policy over these two decades. The first section provides a chronological account of ... https://www.brookings.edu/es/on-the-record/hay-que-reformar-a-fondo-las-reglas-del-financiamiento-politico/Hay que reformar a fondo las reglas del financiamiento políticohttp://webfeeds.brookings.edu/~/565812484/0/brookingsrss/topics/internationalmonetaryfund~Hay-que-reformar-a-fondo-las-reglas-del-financiamiento-pol%c3%adtico/
Mon, 13 Aug 2018 16:49:13 +0000https://www.brookings.edu/?post_type=on-the-record&p=533792

Infrastructure and Climate Change

The world’s core infrastructure—including our transport and energy systems, buildings, industry, and land-related activities—produce more than 60 percent of all greenhouse gas (GHG) emissions globally. At the same time, the world has significant infrastructure needs. From 2015-2030, approximately $90 trillion of infrastructure investment is needed, a doubling of the global capital stock.

Yet, unless the new infrastructure is low-carbon and climate resilient (LCR), the world will be locked into a high-carbon pathway and will miss the Paris Agreement’s goal of keeping the global average temperature increase well below 2 degrees Celsius by 2050. LCR infrastructure includes renewable energy, mass transit, and energy efficiency.

Meeting LCR infrastructure needs will require an additional $13.5 trillion in renewable energy and energy efficiency. Moreover, infrastructure investment consistent with the below 2 degree scenario will also require a reallocation of investment, with less investment in carbon intensive infrastructure and less infrastructure needed due to more compact cities. In fact, the net increase in needed LCR infrastructure is around $4 trillion over 15 years. And this does not take into account savings from lower operating costs of LCR infrastructure, estimated at around $5 trillion. These figures underscore the broader point that there is no inherent trade-off between building LCR infrastructure and development.

Infrastructure and Development

Whether the world builds LCR infrastructure will also determine whether the Sustainable Development Goals (SDGs) are achieved. Around 70 percent of LCR infrastructure needs are in developing countries. Building LCR infrastructure links the climate and development agendas in multiple ways. For one, the poorest and most vulnerable people in developing countries are feeling the impact of climate change most acutely. This link between climate change and poverty is reflected in the SDGs, which recognize addressing climate change as a development outcome.

Infrastructure also has a direct effect on development. For instance, building renewable energy production instead of coal-fired power plants can reduce air pollution and produce better health outcomes. And building compact cities with access to mass transit affects access to other key services such as health and education.

A key challenge is financing the needed LCR infrastructure. Because public finances are constrained, 35-50 percent of incremental infrastructure investment will need to come from the private sector.

Another reason to increase private investment into infrastructure is to harness the efficiency gains from private sector construction and operation of such infrastructure.

Fortunately, there is no shortage of private capital globally: institutional investors have $85 trillion in assets under management and expect to have over $110 trillion by 2020. Yet, current allocations from institutional investors into infrastructure are low—approximately 1 percent of total asset allocations. There is also a shortage of other private capital for infrastructure, particularly LCR infrastructure in developing countries.

The lack of investment in infrastructure is due to infrastructure risks and other barriers. Moreover, LCR infrastructure carries particular risks. These include limited investment track records for new climate technologies, and reliance on government support such as feed-in-tariffs or subsidies. LCR infrastructure risks are also higher in developing countries, where there is greater political instability, poor investment environments, and currency risks.

In addition, the lack of carbon price and fossil fuel subsidies effectively subsidize investments in carbon-intensive infrastructure. As a result, the full social costs of such investments—the negative climate and development impacts—are not properly reflected in these investment decisions.

LCR infrastructure risks also vary over the project lifecycle. Risks are high in the early project preparation stage due to challenges with developing complex infrastructure plans and obtaining permits. As project construction commences, risks grow due to macroeconomic and business uncertainties, as well as possible construction delays, permit cancellations, and sudden shifts in the availability of finance. Only once the project is operational does cash flow turn positive, risks decline, and it can deliver a return on investment.

A consequence of these LCR infrastructure risks is that the cost of capital climbs and finance becomes scarce. This, in turn, stymies LCR infrastructure projects and diverts investment into what is often lower cost, higher-carbon alternatives.

Addressing these LCR infrastructure investment challenges requires aligning public and private finance in a manner that allows the full risks to be borne.

The MDBs have the knowledge and financial position to play a central role in blending their own capital with climate finance to reduce risk and crowd-in private sector capital. The MDBs are increasing their climate investments, yet they face constraints in terms of the amount of finance they can provide and the risks they can accept.

The main multilateral climate funds (MCF) are the Climate Investment Funds, the Green Climate Fund, and the Global Environment Facility, which are all blended finance facilities designed to co-finance with other public and private sources of capital.

The MCF can have the greatest impact by addressing financing barriers to LCR infrastructure by providing small amounts of highly concessional finance alongside other public finance to reduce risk and crowd-in private capital into transformative LCR projects.

While MDBs are also a source of concessional finance, the MCF lend at even more concessional rates, particularly to middle-income countries where climate and LCR infrastructure needs are most acute.

A key focus for MDB and MCF is to improve countries’ enabling environments, which can reduce LCR infrastructure risk across the infrastructure project lifecycle. This includes strengthening countries’ investment environment and institutional capacity. The MDBs make such investments to improve development outcomes, including more targeted support under the Global Infrastructure Facility. Yet, even here, such investments do not necessarily support LCR infrastructure. This is where the MCF can boost country-level capacity to assess LCR alternatives and build a pipeline of LCR infrastructure projects, develop the capacity to use best available climate technology, and build consideration of the below 2 degree Celsius climate goal into the project preparation stage.

Larger amounts of finance are needed at the project construction phase and it is at this point that high costs of capital can render infrastructure projects financially unfeasible. Here, blending finance from the MDBs and the MCF can reduce risks to attract private sector capital into transformative climate technologies in developing countries.

Moreover, as the MDBs ramp-up their climate financing and are guided by the cascade approach to finance, which emphasizes risk mitigation before direct loans, the MCF should be prepared and able to address the remaining financing gaps.

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By Joshua P. Meltzer, Christina Constantine
Infrastructure and Climate Change
The world’s core infrastructure—including our transport and energy systems, buildings, industry, and land-related activities—produce more than 60 percent of all greenhouse gas (GHG) emissions globally. At the same time, the world has significant infrastructure needs. From 2015-2030, approximately $90 trillion of infrastructure investment is needed, a doubling of the global capital stock.
Yet, unless the new infrastructure is low-carbon and climate resilient (LCR), the world will be locked into a high-carbon pathway and will miss the Paris Agreement’s goal of keeping the global average temperature increase well below 2 degrees Celsius by 2050. LCR infrastructure includes renewable energy, mass transit, and energy efficiency.
Meeting LCR infrastructure needs will require an additional $13.5 trillion in renewable energy and energy efficiency. Moreover, infrastructure investment consistent with the below 2 degree scenario will also require a reallocation of investment, with less investment in carbon intensive infrastructure and less infrastructure needed due to more compact cities. In fact, the net increase in needed LCR infrastructure is around $4 trillion over 15 years. And this does not take into account savings from lower operating costs of LCR infrastructure, estimated at around $5 trillion. These figures underscore the broader point that there is no inherent trade-off between building LCR infrastructure and development.
Infrastructure and Development
Whether the world builds LCR infrastructure will also determine whether the Sustainable Development Goals (SDGs) are achieved. Around 70 percent of LCR infrastructure needs are in developing countries. Building LCR infrastructure links the climate and development agendas in multiple ways. For one, the poorest and most vulnerable people in developing countries are feeling the impact of climate change most acutely. This link between climate change and poverty is reflected in the SDGs, which recognize addressing climate change as a development outcome.
Infrastructure also has a direct effect on development. For instance, building renewable energy production instead of coal-fired power plants can reduce air pollution and produce better health outcomes. And building compact cities with access to mass transit affects access to other key services such as health and education.
Financing LCR infrastructure—the need for increased private investment
A key challenge is financing the needed LCR infrastructure. Because public finances are constrained, 35-50 percent of incremental infrastructure investment will need to come from the private sector.
Another reason to increase private investment into infrastructure is to harness the efficiency gains from private sector construction and operation of such infrastructure.
Fortunately, there is no shortage of private capital globally: institutional investors have $85 trillion in assets under management and expect to have over $110 trillion by 2020. Yet, current allocations from institutional investors into infrastructure are low—approximately 1 percent of total asset allocations. There is also a shortage of other private capital for infrastructure, particularly LCR infrastructure in developing countries.
The lack of investment in infrastructure is due to infrastructure risks and other barriers. Moreover, LCR infrastructure carries particular risks. These include limited investment track records for new climate technologies, and reliance on government support such as feed-in-tariffs or subsidies. LCR infrastructure risks are also higher in developing countries, where there is greater political instability, poor investment environments, and currency risks.
In addition, the lack of carbon price and fossil fuel subsidies effectively subsidize investments in carbon-intensive infrastructure. As a result, ... By Joshua P. Meltzer, Christina Constantine
Infrastructure and Climate Change
The world’s core infrastructure—including our transport and energy systems, buildings, industry, and land-related activities—https://www.brookings.edu/blog/future-development/2018/07/03/the-distressing-debt-sustainability-framework-of-the-imf-and-world-bank/The distressing Debt Sustainability Framework of the IMF and World Bankhttp://webfeeds.brookings.edu/~/556183292/0/brookingsrss/topics/internationalmonetaryfund~The-distressing-Debt-Sustainability-Framework-of-the-IMF-and-World-Bank/
Tue, 03 Jul 2018 19:22:57 +0000https://www.brookings.edu/?p=525875

Starting from scratch

The centerpiece should be a thorough analysis of public debt given the entrenched deterioration noted in the March 2018 LIDC debt paper. This would mean quantifying variables that drive debt relative to GDP: primary fiscal deficits and the interest rate-growth differential, as well as exchange rate risks, since over half of the debt is denominated in foreign currency. In addition, the contingent liabilities of banks and state-owned enterprises need to be factored in.

The next step would assess the composition and quality of government spending, the integrity of fiscal institutions and the public investment needed in infrastructure and human capital to meet the Sustainable Development Goals. The latter is bound to clash with debt sustainability even in the best-governed African LIDCs like Kenya and Rwanda.

One would then use simple macroeconomic accounting to establish that unsustainable public finances typically spill over into current account deficits, external debt, and foreign exchange reserves. These latter variables should be treated as symptoms of poorly managed public finances, where the fundamental problem lies.

The focus on public debt and its dynamics is dictated by the exigencies confronting African LIDCs and the donor community today:

The need to reconcile debt sustainability and development in a situation where Official Development Assistance (ODA) is dwindling (see the March 2018 LIDC paper and the 2017 Report of the High Level Panel on reinvigorating African development finance) while public debt problems are intensifying and growth is slowing down. What matters is the sustainability of long-run growth and development for which debt sustainability is a necessary condition, not an end in itself.

The need to reconsider the framework for ODA, including its pricing and allocation. There is considerable scope for this considering first that the market is increasingly defining the marginal borrowing cost for African LIDCs. And second, that concessionality after the HIPC-MDRI debt write off has led neither to sustainable public debt nor a solid foundation for long-run growth. Simply put, concessionality cannot offset the factors driving the deterioration in public debt dynamics noted in Felino and Pinto 2017 and the IMF’s March 2018 LIDC debt paper: weak public finance management systems, misuse of public resources, growth slowdowns, and currency collapses linked to economic and political risks. This calls for a tougher policy dialogue and a higher bar for access to ODA with the goal of igniting a race to the top instead of subsidizing weak policies and institutions.

The 2017 Bank-Fund Framework

It retains the focus on PPG (public and publicly guaranteed) external debt of the original 2004-2005 framework. The framework identifies external debt distress episodes based on arrears or commercial debt restructuring. It runs a probit model to estimate the probability of distress, with explanatory variables that include a debt burden indicator (such as the ratio of the present value of PPG external debt to GDP or exports), the country’s growth rate, world growth rate, foreign exchange reserves and the Country Policy and Institutional Assessment (CPIA) rating.

Next, countries are classified as weak, medium or strong based on a composite of the CPIA and these variables, except for the debt burden indicator itself. Cutoff probabilities of debt distress that balance Type I (missed crises) with Type II (false alarms) errors are picked. The probit regression is inverted to get thresholds for each debt burden indicator for each country group, based on evenly spaced percentiles for the country composite indicator.

The next step is to graft domestic public debt onto the thresholds for the present value of PPG external debt to get thresholds for total public debt. This is defined not as nominal public debt, but as the present value of PPG external debt plus nominal domestic debt.

The final step is to come up with a rule for the level of debt distress by comparing the actual debt burden indicator with the thresholds derived for each country group.

What’s wrong with the 2017 LIC DSF?

First, the 2017 LIC DSF ignores the fact that unsustainable public finances are typically the fundamental cause of debt distress: indicators of public debt dynamics, such as primary fiscal deficits and the interest rate-growth differential (r-g), are completely absent in the probit model. Also missing are market signals on default and devaluation risks, such as Eurobond spreads or interest rates on local debt in excess of inflation targets, or credit ratings, that are relevant given the big shift to market debt.

Second, the focus on the present value of debt is outdated. Not only does this obfuscate debt dynamics because it makes (r-g) hard to interpret, it is inconsistently applied. Only concessional external debt is discounted, at an arbitrary discount rate of 5 percent; market debt, including Eurobonds and domestic debt, is taken at face value because it typically carries interest higher than 5 percent. Today, nominal debt makes more sense because of the profusion of different types of public debt—official concessional, market domestic debt, Eurobonds, and non-concessional bilateral loans—at different interest rates. It is their weighted average that is relevant for debt dynamics.

Third, there is no provision for the constant tussle between debt sustainability and development in economies that need huge investments in infrastructure and human capital, for them to grow and create jobs for their burgeoning youth populations—and reduce the instability from insecurity and mass migration.

It is clear from the 2017 Report of the High Level Panel on reinvigorating African development finance that imaginative ways will need to be found to reconcile debt sustainability and development by using shrinking ODA better and taking on board the growing heterogeneity among African LIDCs. The debt sustainability problems in Ghana and Mozambique, for example, are due to misuse of public resources and weak fiscal institutions. In contrast, Ethiopia, Kenya and Rwanda face the prospects of unsustainable public debt and current account deficits because of big investments in infrastructure. The 2017 DSF doesn’t distinguish between the two.

An Illustration from Ethiopia

This January, the IMF and World Bank downgraded Ethiopia to high risk of external debt distress because one liquidity indicator—the ratio of PPG external debt service to exports—went above its threshold. This effectively shuts off Ethiopia’s access to non-concessional loans.

IMF Country Report No. 18/18 shows clearly that Ethiopia’s current account deficits (CAD) are driven by high fiscal deficits. In 2016-17, the trade deficit was 16.1 percent of GDP of which 13.1 percentage points was on account of the public sector deficit; less than a fifth was because of private borrowing. Net private transfers—mainly remittances—were 6.9 percent of GDP while official transfers were 1.8 percent. This meant that the “public” component of the current account balance was minus 11.3 percent of GDP, partially offset by the private component of plus 3.8 percent of GDP. If Ethiopia is at risk of external debt distress, the cause is its public finances—driven (mainly) by large infrastructure investments. But all the debt sustainability analysis (DSA) says is that public debt is below its threshold and does not “flag additional risks”.

A logical alternative would start with Ethiopia’s public debt dynamics, which superficially look good: the public debt-to-GDP ratio fell from 61 percent in 2014-15 to 54 percent in 2016-17 in spite of primary deficits of about 6 percent of GDP. But this was because of highly negative real interest rates, the result of financial repression and currency overvaluation, as shown in my critique. So the questions the Bank and IMF should be encouraging the Ethiopians to ask are:

What would public debt dynamics look like without financial repression and currency overvaluation, which at present distort the private savings and investment choices?

What international liquidity pressures are being caused by the spillovers from the fiscal deficits into external deficits?

The 2017 DSF would address only the third question. A more relevant DSA would start with nominal public debt-to-GDP dynamics while treating current account deficits, external debt and foreign exchange reserves as symptoms of public finance spillovers. It would analyze recent history in depth, with a short projection period to spotlight urgent policy reforms. This would minimize the temptation to build in excessively optimistic reform and growth scenarios, which—based on the IMF’s own studies, see for example the March 2018 LIDC debt paper and Mooney and de Soyres 2017—seldom materialize. Finally, by facilitating collaboration among governments, multilateral finance institutions and bilateral donors, such a framework would help to reconcile Africa’s debt sustainability concerns with its sizeable development needs.

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By Brian Pinto
This week, the IMF and the World Bank will roll out their 2017 Low-Income Country Debt Sustainability Framework (LIC DSF). What should the DSF look like to be relevant for low-income developing countries (LIDCs) in Africa (listed in Annex Table 1 of the IMF’s March 2018 LIDC debt paper)? That’s a question I take on in my critique, where I conclude that the 2017 DSF is obsolete instead of the “significant overhaul” that is claimed.
Starting from scratch
The centerpiece should be a thorough analysis of public debt given the entrenched deterioration noted in the March 2018 LIDC debt paper. This would mean quantifying variables that drive debt relative to GDP: primary fiscal deficits and the interest rate-growth differential, as well as exchange rate risks, since over half of the debt is denominated in foreign currency. In addition, the contingent liabilities of banks and state-owned enterprises need to be factored in.
The next step would assess the composition and quality of government spending, the integrity of fiscal institutions and the public investment needed in infrastructure and human capital to meet the Sustainable Development Goals. The latter is bound to clash with debt sustainability even in the best-governed African LIDCs like Kenya and Rwanda.
One would then use simple macroeconomic accounting to establish that unsustainable public finances typically spill over into current account deficits, external debt, and foreign exchange reserves. These latter variables should be treated as symptoms of poorly managed public finances, where the fundamental problem lies.
The focus on public debt and its dynamics is dictated by the exigencies confronting African LIDCs and the donor community today:
- The need to reconcile debt sustainability and development in a situation where Official Development Assistance (ODA) is dwindling (see the March 2018 LIDC paper and the 2017 Report of the High Level Panel on reinvigorating African development finance) while public debt problems are intensifying and growth is slowing down. What matters is the sustainability of long-run growth and development for which debt sustainability is a necessary condition, not an end in itself. - The need to reconsider the framework for ODA, including its pricing and allocation. There is considerable scope for this considering first that the market is increasingly defining the marginal borrowing cost for African LIDCs. And second, that concessionality after the HIPC-MDRI debt write off has led neither to sustainable public debt nor a solid foundation for long-run growth. Simply put, concessionality cannot offset the factors driving the deterioration in public debt dynamics noted in Felino and Pinto 2017 and the IMF’s March 2018 LIDC debt paper: weak public finance management systems, misuse of public resources, growth slowdowns, and currency collapses linked to economic and political risks. This calls for a tougher policy dialogue and a higher bar for access to ODA with the goal of igniting a race to the top instead of subsidizing weak policies and institutions.
The 2017 Bank-Fund Framework
This is what 2017 Low-Income Country Debt Sustainability Framework (LIC DSF) does:
- It retains the focus on PPG (public and publicly guaranteed) external debt of the original 2004-2005 framework. The framework identifies external debt distress episodes based on arrears or commercial debt restructuring. It runs a probit model to estimate the probability of distress, with explanatory variables that include a debt burden indicator (such as the ratio of the present value of PPG external debt to GDP or exports), the country’s growth rate, world growth rate, foreign exchange reserves and the Country Policy and Institutional Assessment (CPIA) rating. - Next, countries are classified as weak, medium or strong based on a composite of the CPIA and these variables, except for the debt burden indicator ... By Brian Pinto
This week, the IMF and the World Bank will roll out their 2017 Low-Income Country Debt Sustainability Framework (LIC DSF). What should the DSF look like to be relevant for low-income developing countries (LIDCs)https://www.brookings.edu/blog/up-front/2018/05/21/digital-currencies-five-big-implications-for-central-banks/Digital currencies: Five big implications for central bankshttp://webfeeds.brookings.edu/~/547271758/0/brookingsrss/topics/internationalmonetaryfund~Digital-currencies-Five-big-implications-for-central-banks/
Mon, 21 May 2018 07:00:44 +0000https://www.brookings.edu/?p=517891

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By Vivien Lee, David Wessel

The widely noted rise of bitcoin and other digital currencies could have profound impacts on financial systems and on the practices of the central banks. Will paper currency finally become obsolete? Will bitcoin and its siblings replace the dollar or the euro or the yen? Should central banks issue their own e-currencies? What opportunities do digital currencies present? What risks?

1. A lot of money is already electronic.

Although physical currency is still widely used in most countries (with the exception of Sweden, where the use of cash is shrinking rapidly), consumers around the world routinely conduct transactions without physical currency, using credit cards or mobile phones to pay. Further, much of the money that central banks (bank reserves) issue exists only in electronic form. So in some sense, the idea of digital currencies is not completely new.

Carstens: “When they introduced credit cards, we had to learn how to deal with credit cards. And nothing happened…we survived it. So I think that we will do the same [with digital currencies].”

Ingves: “[M]ost of the central bank money produced is wholesale central bank money, and all of that wholesale money is already electronic. So when we’re referring to cash, that’s…a tiny, tiny fraction of what’s going on in the system.”

Bitcoin and other cryptocurrencies are popular, but most people don’t trust them the way they trust the U.S. dollar, the euro, or the Japanese yen, all of which are backed by a central bank. Despite the erosion of confidence in government institutions, most people still prefer money backed by a central bank, and this is unlikely to change anytime soon.

Patel: “[O]n scalability, actually, some of the things that were promised have not happened. Bitcoin networks handle very few transactions per second, while, for example, an interbank Visa system handles a hundred times that. One reason…is because there is lopsided investment. That again underscores that you need a coordinator because you are getting parts of this whole system where a lot of money goes into the mining part [of bitcoin], and very little goes into everything else.”

Ingves: “What is very much underestimated when we talk about the technologies here is why people use central banks and like to use central bank payment systems…[I]f one bank pays another bank, and…it is not passed through the payment system of the central bank, the only thing that happens is that one bank ends up with a claim on another bank. And bankers don’t trust each other. And that’s why you have central banks transferring the money, because that’s the only safe way of transferring money.”

What is very much underestimated when we talk about the technologies here is why people use central banks and like to use central bank payment systems

Carstens: “[S]uddenly we have a new form of technology, and can we expect that that new technology will substitute for all these centuries of creating good practices that in a way generates the trust that society has on the currency that we know today? Will precisely another currency substitute for all of that? My answer is, with absolute certainty, no…[T]echnology cannot substitute for all what central banks do to make trustworthy currencies.”

3. Still, digital currencies could change the financial system in big ways.

Digital currencies and other innovations in payment systems could increase the speed of domestic and cross-border transactions, reduce transaction costs, and eventually broaden access to the financial system by poor and rural households.

Prasad: “Certainly, payment systems are going to become much more efficient. In China, in India, one can conduct very small micro-transactions with street vendors using payment systems that have been decentralized and that are intermediated, not through the traditional banks but through other platforms. And one can see this very easily catching on.”

Ingves: “New technologies make it easier for money to reach everybody, and that means that essentially what we’re talking about is sending money from one cell phone to another real time. And that’s a worthy vision for the future.”

New technologies make it easier for money to reach everybody…

Prasad: “[O]ne of the reasons why…we are seeing certain…political forces gaining power is because many people don’t feel connected to the economy. Connection to the financial system is a very important part of it. If you feel that the reforms in a country are going to benefit the elite who are connected and most of the others are left out, this is, I think, a very important part of that [frustration. Digital currencies] will give people more access to the financial system…So I think that is at some level a really transformative power in the new technologies.”

4. But these new technologies bring some big challenges too.

Digital currencies and related technologies are likely to reduce transactions costs and decrease the price of acquiring and sharing information, which sound good but can destabilize financial markets and intensify contagion from one market to another. They could undermine the business models of conventional banks and their role in the financial system, making it hard for central banks—which operate largely through the banking system—to maintain financial stability.

Prasad: “If one thinks about information flowing much more freely with the new technologies, that is certainly a compelling argument for why financial markets should work a lot better. But as we know from work that many academics have done…you might end up with certain information aggregators becoming very powerful in an economy where there is a lot of information but not very good processing ability, and that can actually lead to situations where, in fact, you have informational cascades, and herding and contingent behavior becomes worse, not because of limited information, but because there is too much information but not enough signal extracting and processing capability. So in terms of financial institutions and regulation, I think there are many challenges ahead.”

So what banks look like and whether they will still play a powerful role in the creation of money in this very broad sense is a critical issue.

Prasad: “[A]s many of the inefficiencies in the financial system are eroded away, the traditional competitive rents or anti-competitive rents that banks could collect are going to erode. So what banks look like and whether they will still play a powerful role in the creation of money in this very broad sense is a critical issue…[I]f traditional commercial banks play a much less important role in finance, if the central banks’ role in terms of settlement and facilitating payments across financial institutions starts eroding—that makes monetary policy implementation a lot more challenging.”

Prasad: “[W]hat happens as we start thinking about a scenario where payment systems become very decentralized? [C]entral banks do need to be worried about whether this decentralization and the fact that the payment mechanisms are not going to be anchored by any official foundation could create problems in bad times…there is a crisis of confidence when these decentralized payment systems start coming into question or start breaking down for a variety of reasons. That could affect not just monetary stability but economic activity as a whole.”

5. Should central banks issue their own digital currencies?

Very few central banks are seriously considering issuing their own digital currencies—that is, allowing the public to have electronic deposits at the central bank—but many central banks are talking about this option. So far, only a couple central banks have issued their own digital currencies, Ecuador and Tunisia among them. Sweden, where the use of cash is evaporating faster than almost any other sizeable economy, is contemplating whether to issue an e-krona.

Issuing its own digital currency would prevent a central bank from losing market share to bitcoin, and it could make it easier for a central bank to pursue negative interest rates (charge a fee to depositors rather than pay interest) during an economic downturn. But an official digital currency could reduce the role of traditional banks as intermediaries and lenders, and could pose big problems during a financial crisis, if depositors pull money out of traditional banks to deposit it at the (safer) central bank.

Ingves: “[T]he only remaining issue when it comes to this is to what extent it should be possible for the general public to hold an electronic claim on the central bank or not. Or whether we should instead have a system where only banks can have a claim on the central bank and all of this electronically.”

Patel: “[O]ne benefit of a central bank-issued digital currency is that the costs do come down. And that is something that everyone wants, including the government.”

[O]ne benefit of a central bank-issued digital currency is that the costs do come down. And that is something that everyone wants, including the government.

Coeure (in a May 14, 2018 speech at the International Center for Monetary and Banking Studies):“[A]lmost no euro area banks have passed these negative rates on to their household clients…if negative rates are not passed through, this [bank lending] channel will fail to develop to its full potential. An interest-bearing central bank digital currency may help overcome these constraints. This does not actually require cash to be abolished, but rather that it no longer acts as an effective competitor for large transactions. Under these conditions the central bank could gain greater control over the transmission of interest rates to households and businesses. In a deep recession, it could reduce interest rates by more than is currently possible and stabilize economic activity more quickly, reducing the need for other non-conventional measures. And in an upswing, the ability to pay positive interest rates on digital currency would put increased upward pressure on deposit rates provided by banks.”

Coeure: “In a systemic crisis…households and businesses could seek to hold their wealth in the riskless central bank liability rather than the riskier private sector one. While this shift could also happen now between deposits and cash, a digital currency would make it cheaper and faster, making ‘digital bank runs’ more frequent and more severe.”

Carstens: “Central bank digital currencies can facilitate wrongs against banks. They can attract resources to central banks [and] away from commercial banks. That opens a whole can of worms…the central banks are not created to intermediate financial resources.”

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By Vivien Lee, David Wessel
The widely noted rise of bitcoin and other digital currencies could have profound impacts on financial systems and on the practices of the central banks. Will paper currency finally become obsolete? Will bitcoin and its siblings replace the dollar or the euro or the yen? Should central banks issue their own e-currencies? What opportunities do digital currencies present? What risks?
This post discusses answers offered by Agustin Carstens, General Manager of the Bank of International Settlements; Stefan Ingves, Governor of Sveriges Riksbank; Urjit Patel, Governor of the Reserve Bank of India; and Benoit Coeure, member of the Executive Board of the European Central Bank, to these and other questions. It draws primarily from a conference, “Digital currencies: Implications for central banks,” hosted by the Hutchins Center on Fiscal and Monetary Policy in April 2018 and a report, “Central Banking in a Digital Age: Stock-Taking and Preliminary Thoughts,” by our Brookings colleague, Eswar Prasad.
1. A lot of money is already electronic.
Although physical currency is still widely used in most countries (with the exception of Sweden, where the use of cash is shrinking rapidly), consumers around the world routinely conduct transactions without physical currency, using credit cards or mobile phones to pay. Further, much of the money that central banks (bank reserves) issue exists only in electronic form. So in some sense, the idea of digital currencies is not completely new.
Carstens: When they introduced credit cards, we had to learn how to deal with credit cards. And nothing happened…we survived it. So I think that we will do the same [with digital currencies].”
Ingves: [M]ost of the central bank money produced is wholesale central bank money, and all of that wholesale money is already electronic. So when we’re referring to cash, that’s…a tiny, tiny fraction of what’s going on in the system.”
2. Cryptocurrencies aren’t likely to replace government-backed currency soon.
Bitcoin and other cryptocurrencies are popular, but most people don’t trust them the way they trust the U.S. dollar, the euro, or the Japanese yen, all of which are backed by a central bank. Despite the erosion of confidence in government institutions, most people still prefer money backed by a central bank, and this is unlikely to change anytime soon.
Patel: [O]n scalability, actually, some of the things that were promised have not happened. Bitcoin networks handle very few transactions per second, while, for example, an interbank Visa system handles a hundred times that. One reason…is because there is lopsided investment. That again underscores that you need a coordinator because you are getting parts of this whole system where a lot of money goes into the mining part [of bitcoin], and very little goes into everything else.”
Ingves: What is very much underestimated when we talk about the technologies here is why people use central banks and like to use central bank payment systems…[I]f one bank pays another bank, and…it is not passed through the payment system of the central bank, the only thing that happens is that one bank ends up with a claim on another bank. And bankers don’t trust each other. And that’s why you have central banks transferring the money, because that’s the only safe way of transferring money.”
What is very much underestimated when we talk about the technologies here is why people use central banks and like to use central bank payment systems
Carstens: [S]uddenly we have a new form of technology, and can we expect that that new technology will substitute for all these centuries of creating good practices that in a way generates the trust that society has on the currency that we know today? ... By Vivien Lee, David Wessel
The widely noted rise of bitcoin and other digital currencies could have profound impacts on financial systems and on the practices of the central banks. Will paper currency finally become obsolete?https://www.brookings.edu/blog/up-front/2018/05/02/greeces-sisyphean-drama-from-grexit-to-exit-to-the-markets/Greece’s Sisyphean drama: From Grexit to exit to the markets?http://webfeeds.brookings.edu/~/543105604/0/brookingsrss/topics/internationalmonetaryfund~Greece%e2%80%99s-Sisyphean-drama-From-Grexit-to-exit-to-the-markets/
Wed, 02 May 2018 15:57:53 +0000https://www.brookings.edu/?p=514316

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By Theodore Pelagidis

On Friday, April 20, senior officials representing the International Monetary Fund, the European Stability Mechanism, and the European Central Bank as well as key eurozone finance ministers met to discuss Greek debt-lightening as well as to decide what to do with post-bailout Greece. Then, on April 27, the Eurogroup convened in Sophia, Bulgaria, to discuss rules for post-program surveillance and the next steps for official sector involvement (OSI), the technical term for debt relief involving the public sector. Prior to taking any post-program surveillance and OSI decisions, the Eurogroup reassured creditors that Greece will first be required to fulfill outstanding prior actions as stipulated in the ongoing third program. With 88 prior actions remaining, the program is far from complete and the timetable ahead is extremely tight.

Greek Finance Minister Euclid Tsakalotos, in an April 27 interview with the Financial Times, admitted that, once the post-bailout period begins after August 20, 2018, “EU monitoring missions would probably be more frequent than the twice-yearly assessments that are standard in post-bailout countries. It is likely to be a case of three or four visits instead of two.” In other words, in exchange for OSI, surveillance will be enhanced to confirm that reforms continue. Tsakalotos is actually at odds with Prime Minister Alexis Tsipras who talks about a “clean exit,” meaning a post-August 2018 period without any creditor-dictated obligations or conditions applicable to the country and his government in particular.

Clearly, a new hybrid-agreement orchestrated by the European Stability Mechanism, European Central Bank, European Commission, and IMF to supervise Greece after August 2018 is emerging. Its aim is to ensure that either the current or the next government(s) complies with the rules. One other thing is certain: This time the terminology has to change. Nobody wants to hear again words like austerity, memorandum, a new bailout, nor do they want to read opinion article about how costly program failures are hurting European taxpayers.

As for the way forward, the current Shakespearian drama involves two options that once again place Greece again between Sculla and Harybdis, or rock and a hard place. The least onerous, called the “French key” is linked to future nominal growth rates with debt payback tranches; the hard one links gradual debt relief with conditionality measures—in other words, more reforms. The second now looks more likely. Meanwhile, the IMF is pushing for more upfront and unconditional debt-lightening, being rather skeptical of both the European Commission/French gradual approach and the German/Dutch conditional debt relief. This IMF position further complicates the state of play.

In a nutshell, this time everyone needs to project some degree of satisfaction, for three reasons:

With European elections set for May 2019, eurozone politicians need to tell voters that the Greek program has at last succeeded.

The Greek Syriza radical left government needs to signal to voters that an exit to the markets is feasible—i.e., clean exit—and the time to leave behind austerity has come (in fact the government is organizing a party in Syntagma Square to celebrate the “markexit”—proof that at least populism in my country entails some fun).

Last but not least, the IMF needs to convince the world that it can always play a constructive and critical role, even as a watchdog, since it chose to opt out of the third bailout program.

A credit line to support the country to borrow from the markets at lower rates is now definitely excluded. Securing such an option would require passage by numerous eurozone national parliaments, something currently not viable. That would be like confessing that even the third bailout program was a failure.

Since the only game in town is for all players to go through the motions of a clean exit—what remains is to identify a magic formula to bridge the differences among creditors regarding key longer-term parameters. These include as agreement on trend growth rates and primary budget surpluses, which will determine debt sustainability. It is critical for the accord to signal to markets that the level of OSI will allow Greece to borrow at a rate that will not lead to unsustainable debt in the future.

The IMF’s latest World Economic Outlook trimmed the forecast for Greece’s growth, now projecting the economy to expand by 2.0 percent in 2018, down from 2.6 percent in an earlier forecast. Inflation is projected at around 0.7 percent in 2018 rather than 1.3 percent forecast earlier. Growth projections until 2022 are less than 2 percent. It is now clear that the Greek economy, despite 10 years of depression, cannot expand significantly. Growth rates are particularly anemic and certainly insufficient to generate new jobs, higher incomes, and make debt sustainable in the long-term.

On the same note, Greece’s January-March 2018 primary budget was 2.3 billion euros, more than 1.2 billion above expectations, thanks in part to lower-than-forecast public investment. In contrast, for January and February 2018, overdue private debt increased by 2.6 billion euros. Which brings us to the core of the problem that the institutions and creditors seem to (or pretend to) ignore: Large primary surpluses bankrupt the private economy and dampen growth rates. The country’s 2 billion euro current account deficit in January and February 2018 further supports this point. Investments are less than capital depreciation—now only 11 percent of GDP—which is the worst number in eurozone. As a result, productivity keeps worsening.

So, yes, what is needed right now is maybe some more “financial engineering” of the debt profile to match these developments. More importantly, one has to see what tax burden the country can bear given its situation, taking into consideration the need to encourage new investment.

Part of what makes the debt workout so dysfunctional is that nobody talks about the fallout on taxpayers and on the country’s investment prospects during high stakes financial meetings about Greece’s future.

In this context, Greece is again between Sculla and Harybdis as it is condemned to inadequate growth rates that will always neutralize or cancel any temporary debt-lightening arrangements. For a real clean exit, one would expect the adoption of real measures to tackle heavy taxation and dis-investment instead of strangling the real economy to meet an unrealistic 4.2 percent primary surplus.

Yet these measures may not yet have the support of key EU protagonists, as an April 23 tweet by Valdis Dobrovskis, the EU Commission’s vice-president for the euro and social dialogue and official in charge of financial stability, financial services, and capital markets union made clear:

Positive news on #Greece: new #Eurostat data show that Greece has again outperformed its fiscal targets. In 2017, the primary surplus in programme terms has reached 4.2% of GDP instead of 1.75% of GDP target. Good news in the view of the programme conclusion in August! pic.twitter.com/b8Z4XN7nRK

To conclude, debt sustainability comes only when nominal growth is strong. This, in turn, is an output of permanently high investments rates and low taxation. Only after that will high primary surpluses arise naturally as a consequence of growth. It’s economics 101.

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By Theodore Pelagidis
On Friday, April 20, senior officials representing the International Monetary Fund, the European Stability Mechanism, and the European Central Bank as well as key eurozone finance ministers met to discuss Greek debt-lightening as well as to decide what to do with post-bailout Greece. Then, on April 27, the Eurogroup convened in Sophia, Bulgaria, to discuss rules for post-program surveillance and the next steps for official sector involvement (OSI), the technical term for debt relief involving the public sector. Prior to taking any post-program surveillance and OSI decisions, the Eurogroup reassured creditors that Greece will first be required to fulfill outstanding prior actions as stipulated in the ongoing third program. With 88 prior actions remaining, the program is far from complete and the timetable ahead is extremely tight.
Greek Finance Minister Euclid Tsakalotos, in an April 27 interview with the Financial Times, admitted that, once the post-bailout period begins after August 20, 2018, “EU monitoring missions would probably be more frequent than the twice-yearly assessments that are standard in post-bailout countries. It is likely to be a case of three or four visits instead of two.” In other words, in exchange for OSI, surveillance will be enhanced to confirm that reforms continue. Tsakalotos is actually at odds with Prime Minister Alexis Tsipras who talks about a “clean exit,” meaning a post-August 2018 period without any creditor-dictated obligations or conditions applicable to the country and his government in particular.
Clearly, a new hybrid-agreement orchestrated by the European Stability Mechanism, European Central Bank, European Commission, and IMF to supervise Greece after August 2018 is emerging. Its aim is to ensure that either the current or the next government(s) complies with the rules. One other thing is certain: This time the terminology has to change. Nobody wants to hear again words like austerity, memorandum, a new bailout, nor do they want to read opinion article about how costly program failures are hurting European taxpayers.
As for the way forward, the current Shakespearian drama involves two options that once again place Greece again between Sculla and Harybdis, or rock and a hard place. The least onerous, called the “French key” is linked to future nominal growth rates with debt payback tranches; the hard one links gradual debt relief with conditionality measures—in other words, more reforms. The second now looks more likely. Meanwhile, the IMF is pushing for more upfront and unconditional debt-lightening, being rather skeptical of both the European Commission/French gradual approach and the German/Dutch conditional debt relief. This IMF position further complicates the state of play.
In a nutshell, this time everyone needs to project some degree of satisfaction, for three reasons:
- With European elections set for May 2019, eurozone politicians need to tell voters that the Greek program has at last succeeded. - The Greek Syriza radical left government needs to signal to voters that an exit to the markets is feasible—i.e., clean exit—and the time to leave behind austerity has come (in fact the government is organizing a party in Syntagma Square to celebrate the “markexit”—proof that at least populism in my country entails some fun). - Last but not least, the IMF needs to convince the world that it can always play a constructive and critical role, even as a watchdog, since it chose to opt out of the third bailout program.
A credit line to support the country to borrow from the markets at lower rates is now definitely excluded. Securing such an option would require passage by numerous eurozone national parliaments, something currently not viable. That would be like confessing that even the third bailout program was a failure.
Since the only game in town is for all players to ... By Theodore Pelagidis
On Friday, April 20, senior officials representing the International Monetary Fund, the European Stability Mechanism, and the European Central Bank as well as key eurozone finance ministers met to discuss Greek debt-lightening ...